The future growth at Netflix Inc. these days is all about how fast the once mail-order-only DVD subscription company can morph into a leading distributor of digital entertainment.

Netflix, No. 13 in the Internet Retailer Top 500 Guide, is still rapidly ramping up its digital movie and TV show portfolio. But now Netflix will have to make do without content from Starz Entertainment LLC, a premium movie and original programming entertainment service provider owned by Liberty Media Corp.

Starz, which offers 17 cable channels with brands such as Starz and Encore to  as many as 32.9 million subscribers says that as of Feb. 28, 2012, it will cease to offer any content on the Netflix digital entertainment platform. In the rapidly evolving and potentially lucrative business of digital entertainment streaming and downloading, Starz, which airs more than 1,000 movies and original series every month across its pay TV channels, says it wants to keep its future options open.

“Starz Entertainment has ended contract renewal negotiations with Netflix,” the company says in a statement. “This decision is a result of our strategy to protect the premium nature of our brand by preserving the appropriate pricing and packaging of our exclusive and highly valuable content. With our current studio rights and growing original programming presence, the network is in an excellent position to evaluate new opportunities and expand its overall business.”

So far Netflix isn’t saying much about the end of the Starz deal—but Wall Street certainly is. As of 2 p.m. central time on Friday Sept. 2, shares of Netflix had declined about 10% from the previous day to around $211 per share.

Digital delivery is a big part of Netflix’s future. The company has yet to break out revenue related to digital entertainment, but the subscriber count is growing. For the second quarter ended June 30, the number of paid digital subscribers had increased 51.4% to 5.6 million from 3.7 million a year earlier. 

Netflix executives say that nearly 75% of its new subscribers are signing up for its streaming service. “Streaming is continuing to grow rapidly, and with the recently introduced price changes, we’ll be able to further increase the scope and quality of our streaming content,” CEO Reed Hastings and chief financial officer David Wells wrote in their second quarter letter to shareholders.

But in addition to losing Starz next year as a digital content supplier, many subscribers also remain upset with a decision by Netflix in July to raise its subscription price for receiving both streaming content and DVDs by 60% to $15.98 from $9.99, though it now also offers subscriptions to streaming or mailed DVDs separately at $7.99 each.

Favorite